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Wednesday, May 18, 2011

Audiovox: Material Notes

Audiovox (VOXX) has a pretty poor earnings record since new management took over in 2005. Returns on capital have been consistently negative or in the low single-digits. As a result, the stock is pretty cheap on an asset basis; Audiovox's market cap is seemingly substantially lower than the company's net current assets.

In the company's latest financials, released earlier this week, Audiovox lists current assets of $340 million (including $100 million in cash) against total liabilities of $110 million, giving the company net current assets of $230 million. Yet this profitable company trades on the open market for just $165 million. This discount is the main reason Audiovox appears on this site's Stock Ideas page.

But Audiovox's latest financials are misleading. Just one day after the end of the company's fourth quarter (how convenient!), the company closed on a transaction that materially alters the company's balance sheet.

In return for a purchase price of $167 million (keep in mind that this is more than Audiovox's market cap!), Audiovox received $142 million in Goodwill and intangible assets. Basically, the company blew all of its cash and incurred a bunch of debt in exchange for intangibles. Needless to say, Audiovox is no longer a net-net, as it essentially just converted $5 per share of tangible assets into intangibles. (The company's share price is only $7.)

Of course, we cannot know what will happen in the future. Audiovox may thrive and add synergies and all sorts of great stuff. But right now it looks like a risky transaction for shareholders, as Audiovox paid a P/E multiple of around 20 and a price-to-tangible-book-value of 4 when it could have returned a meaningful amount of cash to shareholders.

Saj, I think you could be wrong on this one. Audiovoxx claim this acquisition will deliver an extra $25 million in EBITDA. Tally this up with the existing EBITDA of €42 million and you're looking at the combined company trading at less than 2.5x EBITDA. That seems cheap to me considering interest expense will be negligible. Sure, Audiovoxx will no longer be a net-net, but at least now there is some sort of catalyst towards an improved stock price.

The $42m includes Klipsch so its really trading at 6.5x, which is still cheap. I agree that returning cash to shareholders would have been best, and we probably lost some value with this transaction, but now there is a catalyst to move the stock price in the form of paying off debt and increased cash flow. This stock is easily worth $10.